What Is a Vendor? Overview for Small Business Owners

As a small business owner, you need goods to operate. Your inventory is an essential organ in the anatomy of your business. The tools you use and the merchandise you sell help you accomplish daily goals, and ultimately grow your company.

Think about all the “stuff” you use to run your business. You might buy raw materials to make products or perform services. Or, maybe you buy goods to sell in a retail store. It’s likely you also have overhead expenses, like office supplies.

Where do all the products you use come from?

Often, you buy goods for your business from a vendor. What is a vendor? A vendor is a person or company that supplies products to a business. They are also called suppliers.

Small businesses and vendors

For your small business, you don’t need to buy products from dozens of vendors. You just need a few good vendors that you can count on to deliver.

When you begin searching for a vendor, there are several characteristics you should look for. A vendor that meets your needs must first meet your small business budget. Make sure the price you agree on satisfies both you and your vendor’s bank accounts.

Vendor prices are not the same as retail prices. When you go to the grocery store, a gallon of milk costs the same amount for every person, no matter what. But with a vendor, you can negotiate prices. This is one major reason you should form a relationship with your vendor.

A good vendor is also reliable and ships the correct order, on time, and undamaged. You want to buy from a stable company that has a small chance of closing in the near future. If the vendor goes out of business six months after you commit, you might have to scramble to find another supplier with similar products and prices in a short amount of time.

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Types of vendors/suppliers

There are many different types of vendors that all have slightly different roles in supplying goods and services. These are just a few common examples:

  • Service and maintenance providers perform services.
  • Manufacturers make goods from raw materials.
  • Wholesalers sell goods to other businesses.
  • Retailers sell goods to individual consumers.

Vendors in a supply chain

A vendor is part of a supply chain. Between the moment a product is made and when a customer buys it, the product travels through people and businesses that make up a supply chain. So basically, a supply chain is a network that moves products from factory to shelf. Some networks are simple while others are complex.

Even though each supply chain is different, most will go something like this:

  1. A manufacturer makes a product and sells it to a person or business. The product’s price is lowest at this stage in the supply chain, but shipping costs may be highest.
  2. A distributor moves the product from the manufacturer to a wholesaler or retailer.
  3. A wholesaler buys the product from the manufacturer and sells it in bulk to a retailer. The product’s price rises from the manufacturer’s price, but you won’t pay high shipping fees to get it.
  4. A retailer buys the product from the wholesaler and sells it to the public consumers. The product’s price rises again.
  5. A customer buys the product from a retailer.

IRS forms

When you work with a supplier, use Form W-9 to record your vendor’s information. You can get Form W-9 from the IRS and send it to any vendor in the U.S.

A vendor should provide the legal business name, tax classification (e.g., corporation), address, and tax identification number on Form W-9. Because this is a legal document, the vendor must sign Form W-9. The vendor returns the form to you, not to the IRS.

To make recording transactions with vendors easy, use accounting software. Our accounting software lets you pay unlimited vendors and store all the information you need. Get your free trial today!

This article has been updated from its original publication date of November 21, 2015. 

This is not intended as legal advice; for more information, please click here.

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